Thursday, April 22, 2010

David Rosenberg: The Bubble in Finance is (Almost) Back!

When the earnings of financial companies skied north of 30% of total corporate profits in America just a few years back, you knew there HAD to be a bubble there.

Historically speaking, any time a sector's share of total corporate earnings hits the 25-30% range, you've got a bubble that soon deflates back to or below normal. This happened with energy stocks in 1980.

While the financial sector certainly took it on the chin during the Great Deleveraging, like a bad sequel, finance is back!

Chart courtesy of The Daily Reckoning - you can sign up for a free subscription here.

So far we are registering a "lower high", but are once again at very inflated levels.

And according to economist David Rosenberg (again via The Daily Reckoning), corporate profits wouldn't be so great if you back out the finance sector - which, incidentally, has the good fortune of being able to borrow money at 0.75%.

Eric Fry reports:

“Total US corporate profits rose 30.6% year-over-year in the fourth quarter, a huge swing from the -25.1% trend a year ago,” observes The Daily Reckoning’s favorite economist, David Rosenberg. “But almost the entire story is in the financial sector, where profits have soared 240%, which is unprecedented… Financial sector profits have accounted for 85% of the overall increase in corporate earnings. Total non-financial earnings are up a grand total of 5.2% year-over-year…

“The financial share of total profits bottomed at 10.8% in the fourth quarter of 2008,” Rosenberg continues, “and has since soared to 28.2% of total profits, one of the highest percentages ever. This trend does not look sustainable to me.”

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